It is being reported that the Securities and Exchange Commission asset management unit recently cautioned hedge funds of the problems with the increasing move towards operating more like a mutual fund.
Specifically, Bruce Karpati (the head of the unit), speaking before the Regulatory Compliance Association, an operations and compliance advocacy group, recently said that the retailization of hedge funds has made it easier for unsophisticated investors to invest directly in hedge funds. He further discussed the implications of the JOBS act and how the likely elimination of the prohibition on general solicitation and general advertising could have an immediate impact on hedge fund capital raising because, what were formerly private offerings, can now in some form be broadcast to a much wider audience directly or through brokerage firms.
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Hedge funds are aggressively managed portfolios of investments that use advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns. The pursuit of high returns however by its very nature creates high risk. As such, investors in hedge funds can expect large swings in performance and volatility.
Certainly the SEC's concern (which is warranted) is that hedge funds will be offered by unscrupulous financial advisors to investors who lack the sophistication to understand the risks of hedge fund investing. Whereas hedge fund investing used to be limited to institutional or high net worth investors, as these products become more available to retail investors, the likelihood of fraud claims involving the sale of these products also goes up.
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The White Law Group expects to see a rise in retail brokerage claims involving hedge funds. The firm's managing partner, Daxton White, stated that "anytime you have high commission products, like hedge funds, offered by brokerage firms, you have an opportunity for an unscrupulous financial advisor to sell the product unsuitably to maximize his/her own commissions."